Transforming from Operational ALCO to Strategic ALCO – Let’s Get Started!
February 6, 2019
Being an Asset/Liability Committee (ALCO) member is one of the most exciting roles in the credit union. If you have the urge to roll your eyes right now, read on. Asset/liability management (A/LM) touches almost every area of the credit union and connecting all those dots is not only exciting, it can be hugely impactful.
The main reason ALCO meetings have a reputation for being boring is that more time is spent looking back at what has already happened than looking forward; data is reported and boxes are checked. Sometimes the data is difficult to connect to the real world. What’s needed are better methods of discussing decision information and more forward-looking strategic focus.
The ALCO absolutely needs to handle operational and reporting tasks, but minimizing time spent on the operational tasks will free up time to consciously attend to strategy and the future. Chances are that the ALCO is already looking forward to some degree, but purposefully choosing the most relevant questions and spending quality time can boost the depth and effectiveness of those discussions.
There are countless potential strategic questions for ALCOs to consider. Here are a few that can better link information from various areas for a more holistic decision-making view. Remember to continuously connect the credit union’s strategy to the discussions at hand:
- Are potential future changes in the environment actively considered and are decisions made to prepare for, react to, or monitor them? For example, should we adjust our balance sheet structure to prepare for a recession? What are our next steps if the liquidity crunch worsens?
- Do we know where the strategic plan leads from a financial perspective, not just for the next year, but over the longer-term time frame of the strategic plan? Is the resulting balance sheet structure, risk profile, expense structure, etc. consistent with where we want to go?
- Do we consciously ensure that strategy drives our A/LM decisions? For example, if our target market is working families and we don’t want to take on additional interest rate risk, should we slow mortgage production or should we consider selling mortgages or offsetting risk elsewhere in the structure so we can continue to make mortgages?
- Are we linking data from other areas to A/LM? Do we understand the demographics of our different types of depositors and borrowers?
- Are we actively considering rapid changes in the payments arena and anticipating how to retain and/or replace payments revenue? What does our data show in regards to the shift to mobile payments, changing behaviors in members’ credit card and debit card usage, and usage trends by demographic groups?
- Do we know how delivery channel utilization is changing and have we considered how that is impacting our financial structure? For example, are we clear on how expansion of the indirect channel impacts average deposit balances and metrics such as products per household?
- Have we quantified our aggregate risks and strategic opportunities to fine tune our strategic net worth requirements?
- Do we understand, not only where risks lie, but how to balance risks with rewards? For example, do we know how high rates need to go before our mortgages or autos will become unprofitable?
Even people who dread the numbers can bring purpose, effectiveness, and impact to the ALCO. As the mindset shifts from operational to strategic, ALCO meetings will become more exciting, but the biggest rewards are reserved for the credit union as a whole and its members.
We’re so excited about building more strategic ALCOs that we’ve actually created an education course for just that purpose. Click here for more information.